537: Coronavirus (COVID-19) Supply Demand SHOCK, Debt Defaults Coming, George Gammon Part 1 of 2

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Welcome to the Holistic Survival show with Jason Hartman. The economic storm brewing around the world is set to spill into all aspects of our lives. Are you prepared? Where are you going to turn for the critical life skills necessary to survive and prosper? The Holistic Survival show is your family's insurance program, Better Life. Jason will teach you to think independently, to understand threats and how to create the ultimate action plan. Sudden change or worst case scenario, you'll be ready. Welcome to Holistic Survival, your key resource for protecting the people, places and profits you care about in uncertain times. Ladies and gentlemen, your host, Jason Hartman.

Welcome as Rome is burning. Well, I don't. Well, maybe I do mean that a little bit. Anyway. Okay listeners, so the world is in a bit of a crisis mode. Certainly you have noticed and we have a good guest today. This will be a two part show or part one of a two part show. Part two will be played tomorrow for you. My friend George Gammon is back. He has done quite a bit of research and quite a few interviews with experts on economic impact and the health impact of COVID 19. So we're going to talk about that today and I think you will definitely want to hear everything that is said throughout this show and tomorrow's episode as well. A couple things though. Number one, I'm going to be talking about my projection, my estimation of the impact on Airbnb and I think you'll want to hear that that'll be upcoming in a future episode. Very important stuff given that we see the convention business collapsing all around the world. Cancellations galore. As you know, we've postponed our Meet the masters conference. Our 22nd anniversary meet the Masters was scheduled to be in early May and we have postponed it and hopefully we will have a date that this summer for that event. Again, it's in limbo right now because nobody knows the impact of this thing. It is just too hard to tell. It's very hard to estimate. But as we see that happening, as we see airlines just shutting down thousands of flights and we see the cruise ship business basically over for a little while here, everything will ultimately return. But this is definitely a time of very difficult transition and a lot of the supply chain is affected, a lot of businesses, a lot of industries affected. Very much a time to be paying attention to this. So I want you to remember something though. Okay? First off, the coronavirus is not a drill. Be careful what you are letting Influence you on this. There's a lot of falsehood spreading around social media, making light of it like it's no big deal. And I think this is kind of a big deal. Okay, you'll hear more about that during this interview. But the other thing I want you to know is as we see financial markets struggling, as we see the oil market collapsing, huge impacts of all of this stuff. Obviously, just over 10 years ago, during the Great Recession, the worst economy in seven decades. A few things, number one. So most people consider the day of the start of the Great Recession, the day that Lehman Brothers collapsed. So just keep this in mind. I've said it before, but not for a while now, so maybe you haven't heard me say this. The day before the Lehman collapse, you went to sleep and the world had a certain amount of assets. It had a certain amount of real estate. It had a certain amount of companies and businesses. It had a certain amount of gold, silver, platinum, palladium. It had a certain amount of oil. It had a certain amount of land. It had a certain amount of everything, right? Those assets were there, and they were all quantifiable and everybody could count them. And then you woke up, and that next day you heard the news of Lehman Brothers collapsing. When most people think the Great Recession, the worst economy in seven decades, began, okay? Now, after you heard that news and you looked around the world, guess what? There was the same amount of real estate, the same amount of gold, the same amount of platinum, palladium, silver, the same amount of oil in the ground or out of the ground. There was the same number of companies almost. There wasn't Lehman Brothers and some other companies failed, too, obviously. But generally speaking, right? The world had the same amount of assets before the Great Recession and after the Great Recession, the only difference was the fiat value.

Or to put it another way, the nominal value of those assets. And.

Who was the owner of those assets, right? Because when the Great Recession occurred, some of the ownership changed hands, right? And as is usual throughout history, the.

Rich get richer and the poor get poorer, okay?

Sadly, that's the way it works. And the nominal value or the fiat value of those assets changed, right? In other words, nominal. The definition for that again, is in name only. Nominal means in name only. And fiat means by authority. You know, everybody talks about fiat money, right? Well, it's by authority, right? It's by decree. Because there is a law, okay? The legal tender laws in the United States and other countries, they have, you know, different laws, but this concept remains that says the almighty US Dollar is good for all debts, public and private. If you don't believe me, pull one out of your wallet and read what it says. Valid for all debts, public and private. Right? So the legal tender laws are the fiat authority that give the currency with no specific real value since 1971. They give it its value as the law. The law gives it its value. The fiat, the authority of the law. And nominal in name only means that you know the name, the value name, right? In other words, if Lehman Brothers stock, and I have no idea what the number was, but if Lehman Brothers Stock was worth $50 a share, right? And by the way, this doesn't matter if the company's public or private, because there are still shareholders, okay? There's either one shareholder or there's a whole bunch of shareholders. And they may have a private ownership or they may be public. Doesn't matter, right? There's still a share value with every company. So maybe the shares were worth $50 each and there were a bazillion shares outstanding, and then after it collapsed, the shares were worth zero. So that was the nominal value, the name of it. But all the basic assets in the world were still there. So I guess I'm saying this to say, look, don't panic. Life will go on, okay? Things will definitely happen. This is not a drill. This is a serious thing. There will be huge opportunities created out of it. Now, during the Great Recession, when I was talking to you, I was talking to you about the contrarian investors. I was talking about the way those investors were being opportunistic. Some might call that vulture capitalism. There will be opportunities. There are opportunities now because guess what? Maybe real estate prices haven't changed, but guess what got a lot cheaper. Money. Money got cheaper last week. And you know what? It's probably gonna get a little cheaper again, okay? So that money is a huge asset. What I mean, there, of course, is the mortgage money, right? I mean, the mortgage money. So huge opportunities, always created. And that's why you're listening to this show and following my work. But because I have helped thousands and thousands and thousands of people make I don't know how much money, but lots of it, okay? I hear about it all the time. Even, you know, back to my career in traditional real estate for 19 years before I spent the last 16 years in the investment side of the business. That's what I do, right? Everybody does a different thing. What I do is I help people make money and create wealth. That's my job. We're going to help you do that through this whole thing. So keep on listening. Listen to this show, listen to tomorrow's show. Listen to all of them. Go back and listen to the back catalog. If you're new to our show, be sure to check out the Jason Hartman Quick Start podcast. On any podcast platform, just type in Jason Hartman quickstart and you'll get some of the more fundamental information there. Here you'll get more news information and strategic information as events unfold. Obviously, that's what we're doing today as well. And if you want to talk to one of our team, our investment counselors, they'd be happy to help you do a portfolio makeover. Position your portfolio to protect your wealth and grow your wealth through these. As the old Chinese saying goes, may you live in interesting times. And these are definitely interesting times. So that's what we're here to help you with. And you can reach us at 1-800-HARTMAN that's 1-800-H A R T M A N or of course, Jason hartman.com. let's go to part one as we talk to George about what's going on in this crazy world.

It's my pleasure to welcome my friend George Gammon back to the show. I asked him to come on today to talk about the impact of COVID 19, the cerveza sickness, maybe coronavirus. It's not something to laugh about, right, George? But anyway, that'll help us from not getting demonetized. And we want to talk specifically, specifically about the concept, which is very rare as an economic malady. You know, I talk about the three economic maladies all the time. Inflation, deflation, stagnation. But this one is kind of interesting and nuanced and rare and very disconcerting too, because since we've had the markets really recognize the impact of coronavirus, we are in a position where we are beginning to see a, a supply demand shock. And this is a rare malady. So I want to talk about that. But we're going to talk about a bunch of other things. I think we'll go on a lot of tangents today for you who are only listening on audio. We will also put this on our YouTube channel because George is fantastic with the visuals with the whiteboard, and we will be showing some of his whiteboard segments here in order to elaborate on what we're discussing. But hopefully it'll come across really well for you if you're just listening to the audio. Audio as well. George, welcome back. It's great to have you.

Thanks. I appreciate you inviting me back on. It's Always a pleasure to talk.

Yeah, it sure is. And these are scary time. The markets finally, just about a week and a half ago, really started recognizing the impact of this very serious thing. And just to talk about it for a moment before we get into the economic impact, which is significant, and we're going to hopefully impart to our listeners some things that can really help them weather the storm. When it comes to the health impact, I think it's important because so many people are spreading really falsehoods on social media. You know, I look through my Facebook feed, I look through Twitter, and I'm seeing these people saying, you know, what's the big deal? The flu kills more people, blah, blah, blah. That is not true. This is different. There are very important nuances. And since you and I have both been doing a lot of research about it, I just thought I'd let you talk about that a little bit before we jump into the financial side.

Sure. The big difference between the coronavirus, cervas of sickness, whatever you want to call it in the normal flu, first and foremost is the R naught value. So the R naught value is just a scientific way of saying how fast does it spread from one person to a group of people? If one person has the virus and the R naught value is four, like it is with the coronavirus, then that one person is going to spread it to four people and then it just grows exponentially from there. The flu is 1.28, so less. So that is a huge, huge difference. When you get into the exponential growth curve and the math of it and to get a virus to where it just self extinguishes, you want that R naught value at one or lower. You get it lower than one and it's just going to fizzle out because that one person isn't passing it on to enough people in order for it to grow. So that's the first big difference. The second big difference is the serious complication rate. So you've got something that grows much, much faster, four times faster than the flu. But the amount of people that require a hospital bed are far greater. I've seen some studies and a lot of people that I have a lot of respect for say that that can be as high as 20% to zero. So if you have something that takes three months, let's see, not even that. Let's say it takes two months to go from zero infections to a million infections in the United States. And 20% of those people call it 200,000 need ICU beds. Well, we've only got 100,000 in the United States. So even if the death rate is around 2 or 3%, which is still a lot higher than the flu, but it seems like, okay, this could be manageable. But that's if you've got full capacity in your hospital system, if that's strained at all, obviously that 3% is going to go up to 6%, 10%, who knows. And there's places in Italy and so this is not like a third world Eastern, oh, it's not going to affect us type thing. If you look at Italy, you see several stories of doctors and nurses saying that they're at 200% capacity. It's gotten to the point there where they have to make some very difficult choices. What I mean by that is if you've got two people coming into the hospital, one's 70 years old and one 70. Yeah, 30 years old, you're really going to have to decide, okay, we've only got one bed, who do we send away and potentially let die and who do we treat? And that's what it's most. Unless we get a miracle, which obviously we're all praying for.

I mean, Berlin has some possible good news. Chris Martinson was talking about that. He's been on the show a few times before. There may be, you know, let's all hope for a miracle, but go ahead.

Yeah, if we see the numbers play out in the United States like they've played out in Italy and unfortunately, because the United States isn't taking this seriously, just going back to what you're saying with all your friends on Facebook or Twitter who just say, oh, it's just the flu. What's the big deal? The flu kills 80,000 people a year and the coronavirus has only killed 100. This is all just media hype. Those people are going to get a rude awakening in about three or four weeks because, well, I'm not going to say it's going to happen, but unless we get that miracle, I think it's probably going to play out even worse in the United States than it has in other areas. Just because we're so nonchalant about it.

Well, not only that, we're really America is the land of the land of the free and the land of the rugged individual. Right. And Americans don't like being told what to do. You know, they look at it as government oppression. And you know, China, I had my friend who lives in China just on the show as you know. And the one thing you can say about a one party country, that's Argue whether it's communist or not. That's debatable in some ways, but it is efficient. You know, they can put the country on lockdown and people are going to listen. Okay, there's only gonna be a few outliers. But in a country like the US where everybody's so like, freedom is like entrenched in their soul, they're just gonna break the quarantine. They're not gonna listen if that ever happens. Right. And the likelihood of the government doing it is going to be lower here. So there are some times when all this, you know, freedom with this great, it works against us.

Right.

Yeah. There's a downside, obviously. As a big libertarian myself, I would say the upside's better, but in situations like this, by the way, I should.

Mention when George picked me up at the airport in Medellin a couple of weeks ago, when I was there, he was wearing a Gadsden flag hat. So that's how Libertarian George is. Okay.

I go back and forth between that one and the hashtag and the Fed.

Well, and, well, and then you also have two Ayn Rand hats that I noticed in your house.

Yeah.

George is a bit of a libertarian, for sure. Go ahead.

Yeah, but there is an advantage to that, like you're saying, and I think when I mean nonchalant, what I more specifically, we're not testing. And like South Korea, they did a lot of testing. Singapore has done a ton of testing. And so you know that, hey, I've got the virus so I can self quarantine because you know that your 80 year old grandmother is much more susceptible. So you're not going to go over there for the Friday night party just makes a lot of sense. But if you're not testing, you can't do those things. And going back to the math, that's what brings that R naught value from four or six all the way down to one where it needs to be. So this thing doesn't go exponential, it's just more linear.

Okay. So that the other thing is this virus is tough. It lives outside of the body longer and it's more hardy than other virus and it's airable and it's airborne. So they say you got to be 6ft from a person to have a good chance of being protected. You've got to wear eye protection, a mask, and certainly don't touch, don't shake hands. It lives on fabric, it lives on countertops, it lives on doorknobs. If you ever thought about becoming ocd, this is the right time. To become ocd. Okay.

Yeah. Not that it's a joke, but I was thinking just Howard Hughes was a little ahead of his time.

He was ahead of his time. Yeah. This is the time to act like crazy old Howard Hughes. Yeah. Okay, so we kind of covered the major health component. Let's jump into the economics. Markets have recognized this. They are scared to death. Events are being canceled all over the world. We postponed our Meet the Masters event. By the way, you were one of the speakers at that event. I hope when we finally do the event, you can still come and speak to our audience. Event planners, hotels, airlines, cruise ships, obviously are really suffering, but there's a whole supply chain around the planet, and China is sort of at the beginning of the supply chain for a lot of products. Right. Let's go over this.

94% of the Fortune 1000 companies have part or all their supply chain coming from China.

Yeah.

And many in Wuhan, that whole area.

You got it. You got it. So this is something that can potentially affect worldwide supply chains, meaning that you could have a supply shock. So if you go back through US history, you look at oil embargo in the early 1970s, that was an example of a supply shock. If you look at Hurricane Katrina in New Orleans, where you go down to your local store and there's just nothing on the shelves, that's an example of a supply shock. What we're accustomed to in the United States is trying to battle demand shock. So we go through the great financial crisis or the global financial crisis, and all of a sudden no one's spending money because no one can get credit. Their asset, their main asset, their house, has collapsed in value. So no one's outspending or buying things. But there's still plenty of things on the shelves.

Right. So here's what's interesting about that, George, and you're probably going to allude to this if I don't say it, but we have. Well, the central planners at the Federal Reserve and the government have tools to deal with that shock. They can stimulate, they can do more QE and just push money. They can flood the system with money, and that'll cure some of that because people will just take the money and go spend it and then that's resolved. But this is a rare dual shock that we're really. We're not facing it yet, but it's early. We're going to experience the dual shock, which is. Has some unique properties.

Right.

I've never seen anything like this in US history. If you go back to the major Economic events. I've never seen a supply and demand shock, a huge one, happen simultaneously. It's not saying that it's 100% guaranteed going to happen, but all the components are in place for it to play out within the next few months. So why demand shock? Well, if everyone is staying in their house because they're afraid of getting sick, if the whole country is on lockdown, like in Italy, no one's going to these conventions, no one's flying, no one's going to Florida for their vacation. They're not out spending money. That's the last thing on their mind. So that's what creates this demand shock. While at the same time, if you look at a. I had this really cool pictograph that I used in a video last week that showed the top 10 importers from China in the United States. So number one was Walmart. Number two, I believe was Target. But you had Lowe's, Home Depot, all these big box stores that the majority of Americans go to at least once a week, if not once a day, they're getting the majority of their products from China. Okay, well, if China has been in lockdown mode and it takes 30 days to get those goods from China to the United States, there's gonna be a big lag. So we should expect to see supply shocks in the United States within the next month or two.

And we surveyed already, if you want to know how that feels, you got a little taste of it already. And anybody who has gone to any Costco around the country has reported to me and sent me photos of how all the water is gone, all the paper products are gone. I'm not quite sure why the toilet paper thing specifically, but that's. I don't know. I guess that's the ultimate necessity item. That and water, maybe, but, you know, we've never seen those shelves empty. I went to several stores over the weekend. Cvs, Walgreens. I could not find any hand sanitizer. None. It was. And there were notes on the shelves, yellow notices that said, we're out. Don't keep looking around the store. Don't ask our people. We just don't have it. That and the hand sanitizer, the wipes, the water, the paper products. You've seen that. My friend told me he was talking to one of the Costco employees, and they said rice and pasta are the other things they said. When bags of rice come in and they get pallets and pallets of the rice delivered to Costco, they're gone in an hour. Everything's gone.

Yeah, so in that same video, I kind of did this thought experiment on how that plays out. And if we see that come to fruition in the United States, I think you're going to have consumer prices on those items go through the roof. You could see them double, triple, quadruple in price, while at the same time you see prices on higher end items completely collapse. So you see car prices, as an example, completely collapse, while at the same time Rice quadruples.

Interesting. Okay, take us through a little of this video, if you would. You've got your whiteboard on the screen now. And for those of you listening on all audio only, we'll elaborate on this so it'll make sense to you. Go ahead, George.

Okay, so what I did in yesterday's video, which now has 60, 70,000 views, it was really popular, is I went through how the corporate bond market and the credit markets are affected by this crash in oil, by the coronavirus and by this, call it everything bubble turning into an everything crash. And they all are connected. And I don't think most people realize this. And when it comes, especially when it comes to the corporate bond market, I think people are just whistling by the graveyard. And this is really the center of everything and everything that could go wrong if it gets really bad in the United States. So I kind of outlined what the corporate bond market is, how it works, and why it's so important. So if you're looking at this whiteboard, you see this circle which is kind of indicating or representative of the market, and you see the line that's call it separates the lower 15% from the upper 85%. So below that line is junk credit or high yield credit. That's corporate credit like Tesla or an Uber. That would be considered high yield or junk because the credit ratings don't give it a triple B. That's the line in the sand between investment grade and high yield, which is junk bonds. Yeah, so that's very important, that line in the sand. In the junk bond market, you've got about 1 trillion, a little over a trillion there. Just in the triple B, which is kind of the first step in the investment grade, you've got $4 trillion of corporate debt. So that would include companies like Ford, IBM, Heinz, AT&T that have really loaded up on corporate debt to buy their own shares back over the past 10 years.

Okay, so let's talk about that for a moment. So a lot of people have been saying that the reason the stock market, or one of the reasons the stock market has just been setting records and it's just been incred is the share buybacks. And so companies like AT&T, Ford, Heinz, et cetera, et cetera, there's a whole bunch more, of course, have been borrowing. They've been doing bonds, right, to buy their shares back. And those bonds, which might have been Triple A, are now Triple B. And as you go down that ladder, the next step down is high yield or junk bond status.

That's correct. And the big reason that's important to understand because the pension funds have been supplying the majority of this liquidity or cash to the corporate bond market. So taking it even a step further back, why they've been doing that, because the Fed dropped interest rates to zero for so long and these pension funds have to have a 7% return to meet their liabilities. So if you can typically go into a 10 year treasury and get 5 or 6%, well, it's not going to be that hard for that pension fund to meet their obligations. If you can only get 1 or 2% on a 10 year treasury now you've got real big problems. So the pension fund managers said, well, what do we do? Let's go somewhere where we can get a little bit more yield. Let's go into the corporate bond market. So I want to be clear that that was a result of the Fed policy. It was an unintended consequence of what the Fed did. So the pension funds take all this cash, go into the corporate bond market. The corporations, to your point, take that money. What do they do with it? They just buy their own shares back? Because it's just this financial engineering where the CEOs can pay themselves more. It looks like their earnings per share goes up, but all they're doing is just borrowing to buy something that gives them a sugar rush. And at some point in time they've got to pay the fiddler. If their cash flows stay consistent like with AT&T, then okay, they might be able to service that debt. Not a big deal. And what most of the bulls point out is that while the cost of servicing that debt is extremely low right now because of this low interest rate environment. But what they're not saying is that that debt rolls over and a lot of these corporations have to roll it over every two years, every five years, and then they're assuming that their cash flows stay consistent. Well, like you know, and I'm sure a lot of your listeners know that in a recession or in a depression, the cash flows of these companies plummet. So if you have a situation where the cash flows are plummeting and the stock market is going down. So that's creating this situation where a lot of their debt, meaning those corporations, is getting downgraded into junk, which means the interest rate on that debt goes through the roof.

What does through the roof mean? What's the differential there? I mean of course it varies by company and such, but give us an idea.

Well, if this plays out, I think it could double easily the debt load.

Or the cost of servicing the debt doubles for these companies.

Yeah. Let's just look at it like a mortgage. I think that's the easiest way to describe it. You're a real estate investor and you're buying $100,000 home and you're taking out a mortgage. Let's say your interest rate is 4% and your monthly payment is X. And after you do all the math, you're $200 cash flow positive. And as your listeners, because they're smart, they take out fixed rate debt so they don't have to worry about these things. But the corporate bond market isn't 30 year fixed rate debt. It rolls over.

The big companies don't have Fannie Mae and Freddie Mac subsidizing their loans.

No they don't. So when that debt rolls over, if it's now, call it 8%, you can imagine what that would do to that positive cash flow that you had in that rental property. Now all of a sudden you're probably cash flow negative.

Yeah, right.

And that's just in a, that's a microcosm of what's going on in the corporate bond market. In addition to that, taking it back to the real estate example, the corporations cash flow gets slashed. So imagine having a rental property where your interest rate on your mortgage doubles, but your rent goes from $1,000 a month to $400 a month. And that's the situation. And then you take it a step further and the entire real estate market has been built on real estate investors buying more real estate properties, right?

Yep.

And what you're doing is you're just making the comparison with the stock market and the large companies that have.

Yeah, I'm not saying that's happening. I'm just using that as an example that most of your listeners can easily understand because they're real estate investors. So if the entire real estate market has been propped up by real estate investors going in and buying these properties because they're cash flow positive, if all those buyers go away, then the real estate market drops plus the cash flows drop, plus the cost of servicing the debt goes up. You just have this.

And wait a second though. Before coronavirus, everybody was talking about the everything bubble, okay? And certainly about the stock market bubble specifically. We have out of whack valuations before any of this started, right, with with PE ratios in the stratosphere, price to earnings ratios, where the stock market is like a cyclical real estate market. It's like buying in areas that we would never recommend, like expensive west coast of the United States markets or expensive Northeastern markets or Miami. These markets just, they were too expensive to begin with. They had completely out of whack price to earnings ratios. Or in real estate, we use rent to value ratios. Same idea. And so now you add to it this situation with their financing getting a lot more expensive and these companies are in trouble.

They absolutely are. But it's not just these companies that are in trouble because there's a direct correlation between those companies and the overall stock market. And unfortunately, our economy has been so financialized over the past 20 years that now it's the tail wagging the dog. Where the stock market should be a reflection of the economy, now it's not. It has nothing to do with the economy. But the economy is completely reliant upon the stock market because of demographics, because of the baby boomers having their 401k, they're going to be taking that out. It's all about consumer spending. It's all about confidence. I've been saying this on Twitter and my videos a lot lately, that this whole system is built on confidence. And if that confidence goes, the whole house of cards comes crashing down. The main thing to understand with this is the line. The 15% and below is junk debt. The 85% above that line currently is investment grade debt. And the pension funds can only invest in investment grade debt. That's the key takeaway from this picture.

In other words, they're restricted. Most of them not right, but most of them right.

That's right.

Not to mention we've profiled it on the show many times, but there's a huge pension problem around the world, you know, not just in the U.S. but yeah. Okay, go ahead. This will be continued on the next episode.

Thank you for listening and happy investing.

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